Sterling steady ahead of UK inflation data

12 December, 2017

Asian equities lost momentum Tuesday despite U.S. stocks ending Monday at record highs. Traders shrugged off a Manhattan Subway explosion, in what was called a terrorist attack, but trading volumes were low ahead of the final round of central bank meetings for 2017. Energy stocks are outperforming other sectors as Brent crude climbed to its highest level since June 2015, on the shutdown of the Forties North Sea pipeline. Brent traded above $65.70 and widened the spread with WTI to $7.21, a level last seen in August 2015. Such a reaction indicates that supply disruptions can no longer be ignored in tight markets.

In currency markets, traders are on stand-by. The dollar is moving in very narrow ranges ahead of the Fed’s monetary policy decision on Wednesday. A 25-basis points rate hike is completely priced in the dollar, so traders should take their signals from different catalysts. Chair Janet Yellen’s tone, economic projections, and the dot plot are what’s going to drive the dollar for the remainder of 2017. Given that we’re getting closer to a deal on tax reforms, the Fed might become slightly more hawkish and ignore the stubbornly low wage growth. Whether this will lift the central bank’s growth projections and the dot plot, remain to be seen, but chances are high.

Having successfully moved into phase 2 of Brexit talks, the focus will shift back to economic data in the UK. Today’s November CPI will likely be a market moving indicator for Sterling. A rise above 3% in inflation requires Mark Carney to write a letter to the chancellor explaining why inflation is above its 2% target. I think chances of UK CPI exceeding expectations are high given the surge in oil prices. This will likely provide short-term support for the GBPUSD as traders will begin projecting another interest rate hike early 2018.

After surging to a new all-time high on Monday, Bitcoin fell below $16,000 today, before recovering some of its losses. The CBOE’s bitcoin futures launched on Monday, proved to be more volatile than the original asset itself, although futures contracts are meant to tame volatility. I think it’s we get there. The fear of short sellers attacking the bitcoin didn’t arise yesterday, indicating that the cryptocurrency isn’t seen yet as the big short. However, what scares me now is that people are taking out mortgages in order to buy bitcoins according to U.S. securities regulator, and this is not a good sign.

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